Wednesday, October 7, 2009

Gold Is a Measure of Paper Trust

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src="http://pagead2.googlesyndication.com/pagead/show_ads.js">The things the U.S. is doing to combat an economic implosion are stupid. Really stupid. The same stupid things are being done world wide and China is no different. Here's a link to a Bloomberg article on Japan's new wonder plan to spur on more lending.

In the article, Japan's financial services minister discusses a brilliant plan to have a "debt moratorium" for small businesses and individuals. This means debtors can just stop paying the principal and interest payments on their loans. He then goes on to state that such tabled loans do not have to be treated as bad debt/bad loans on the books. Banks will also be forced by government decree to make more loans under this plan.

Can you understand why Gold is going higher? It's not the "money printing" or debt expansion, which is like blood and oxygen in a fiat system. It's the loss of confidence in governments that back fiat paper currencies. When a bunch of bozos are driving the bus off the cliff, do you want to follow them?

Paper money has ZERO intrinsic value. It is governments that mandate the initial value of fiat currency (fiat = "by decree") and then do everything in their power to destroy that value over time by printing too damn much of it. But there is almost always inflation in a fiat system and there is not always a rising Gold price.

It takes a turn in the social mood and a lack of confidence in "the powers that be" to get Gold moving. Whether there is deflation or inflation is not as important as a loss of confidence in the governments that back a currency that causes people to move to Gold. Remember the confidence and social mood in the late 1990s in the United States? Greenspan was "printing money" and facilitating debt expansion like a drunken moron and yet the Gold price kept going down.

The mood has turned. Confidence is evaporating. Confidence is everything in a paper Ponzi scheme. The Dow to Gold ratio has reached the 1-2 range in an inflationary decade (1970s) and a deflationary one (1930s). We are going there again. The United States has more to lose than most if confidence is lost in paper currencies. Why? Because we are the reserve currency of the world and if that changes, it will hurt both politically and economically. But to think the U.S. is the only country primed for a crisis in confidence is silly. This is a global phenomenon. Britain's currency will collapse before the United States' will. Japan is a basket case, as the above article clearly shows. Eastern Europe is in trouble as are the European financiers that lent them money.

The collapse of a global debt bubble has begun and such an event takes at least a decade or two to play out. Such secular events coincide with a loss of confidence in the "powers that be," who always run around like chickens with their heads cut off trying to maintain power (i.e. placate the masses) and maintain favor with the corporations and bankstas that line their pockets. The sheeple are dumb but not in a coma and they are beginning to see that the Wizards behind the curtain are frail, feeble and unable to stop what is happening.

When trust in the institutions that back paper money is shaken, trust in paper money itself is shaken. Paper dollars backed by nothing but shysters and their broken promises return to their intrinsic value once times get hard. Gold is simply a mirror and right now Gold doesn't like what it sees. Confidence in government will continue to decline as this secular credit contraction grinds on for years. The purchasing power of Gold will continue to rise throughout this period, short and intermediate-term moves aside, and Gold will outperform the U.S. Dollar, stocks, corporate bonds, real estate and commodities. Until the Dow to Gold ratio reaches 2 (and it may well go below 1 this cycle), stocks are a lousy long-term investment. Gold is not rising, confidence in paper promises (i.e. fiat money) is declining. Gold is rising over the long term in all currencies, not just the U.S. Dollar.

Wanna see a crazy chart that shows how worthless paper promises can be? Take a look at this chart of Gold priced in Indian Rupees over the past 26 years (chart copied from goldprice.org, a good site, and props to Mad Scientist as I hadn't seen this chart before he posted a similar one on his blog):

Loss of confidence. This is why Gold can rise in a severe deflationary environment and why it will outperform the U.S. Dollar during this secular credit contraction. This is what Exter's liquidity pyramid is all about and why Gold does well during a Kondratieff Winter. Even if the U.S. Dollar rises relative to other intrinsically worthless paper currencies, Gold can and will go higher as the U.S. Dollar Index is not designed to reflect/record the fact that confidence in all paper currencies is sinking at the same time.